INCOME TAX OFFICER v. POOSARLA VISWESWARA RAO AND V. NOOKAIAH CHETTY
[Citation -1985-LL-0813-8]

Citation 1985-LL-0813-8
Appellant Name INCOME TAX OFFICER
Respondent Name POOSARLA VISWESWARA RAO AND V. NOOKAIAH CHETTY
Court ITAT
Relevant Act Income-tax
Date of Order 13/08/1985
Assessment Year 1975-76
Judgment View Judgment
Keyword Tags benefits of partnership • fictitious transaction • concealment of income • concealed income • positive income • cross-objection • purchase price • initial burden • market price • net loss
Bot Summary: These transactions were said to be purchase and sale effected with Shri Nookaiah Chetty, i.e., the minors' father himself. The purchases effected by the assessee would be shown as the sales made by Shri Nookaiah Chetty and also the sales effected by the assessee shown as purchases there. There is absolutely no means of making out a case that the transactions between Shri Nookaiah Chetty and the assessee were collusive. The transaction is not fictitious insofar as funds have gone out of the assessee's coffers to the coffers of Shri Nookaiah Chetty. As we have pointed out earlier, it is not the department's case that the books of Shri Nookaiah Chetty do not show these transactions. Shri Madhava Rao partner, had stated that the firm itself was started to help Shri Nookaiah Chetty. Under the circumstances, relying on the evidence of Shri Nookaiah Chetty who had reaped full benefit out the alleged fictitious transactions, it would be very difficult to make out a case against the firm for concealment.


We can dispose of appeal and cross-objection together. departmental appeal is against order of Commissioner (Appeals) cancelling penalty under section 271(1) (c) of Income-tax Act, 1961 ('the Act'). 2. Briefly, facts regarding concealment of income are as follows: assessee is firm having business in manufacture and sale of jaggery and groundnut oil. assessee-firm consisted of six partners of which two were minors admitted to benefits of partnership. minors between themselves are entitled to 60 per cent of profits while other partners together are entitled to 40 per cent. 3. assessee had filed return showing net loss of Rs. 63,560. Before t h e assessment was taken up, ITO received information from one Shri Nookaiah Chetty who is none other than father of two minors admitted to benefitis of partnership. Shri Nookaiah Chetty had stated before ITO that there were certain fictitious transactions recorded in books. Certain letters were written to ITO by Shri V. Venkata Nageswara Rao who was one of minors admitted to benefits of partnership giving specific instances of fictitious transactions. These transactions were said to be purchase and sale effected with Shri Nookaiah Chetty, i.e., minors' father himself. letters stated that these were really untrue state of affairs and by this device substantial income was reduced in their accounts. It was also stated that income reduced was Rs. 23,526. 4. We may mention that owing to difference of opinion among partners, partnership was dissolved on 16-12-1975, that is long before date on which information was given by Shri Nookaiah Chetty and his son regarding fictitious entries. In facts, certain litigations were pending between erstwhile partners at that time. 5. ITO examined books of account with reference to information given by Shri Nookaiah Chetty and his son. He found that transactions referred to in their letter were not reflected in books of account. T h e y were also not reflected in stock register. He found that certain expenses connected with transactions like jaggery expenses, Kolagarams (sic) were noted in connected account on same date on which fictitious transactions appeared. examination revealed that assessee had purchased from Shri Nookaiah Chetty certain quantities of jaggery which had sold back to same party at less than purchase price on same day. Having regard to this fact, that is, purchase and sale on same date to same party, loss arising out of transactions amounting to Rs. 23,508 in respect of Shri Nookaiah Chetty and Rs. 1,638 in respect of another firm by name Sambamurty Traders were disallowed in assessment. appeals were unsuccessful and Tribunal confirmed additions. 6. ITO was of opinion that making entries of fictitious transactions resulting in loss was with deliberate intention of concealing its particulars of income. sale and subsequent buy-backs at higher and lower rates are designed to reduce its normal profits and thereby tax liability. According to him,. conduct of assessee clearly shows that it had full knowledge of result of transactions. In those circumstances additions represented concealed income. He, therefore, imposed penalty amounting to Rs. 25,146 under section 171(1) (c). 7. assessee appeals. Commissioner (Appeals) cancelled penalty. He pointed out that law to be applied is what has been explained by Andhra Pradesh High Court in case of Addl. CIT v. Burugupalli China Krishnamurthy [1980] 121 ITO 326. According to this authority, onus continues to be on department to show that there was concealment. After studying facts, he came to finding that initial burden of discharging onus has been carried out by assessee He pointed out that all purchases and sales of alleged fictitious transactions were duly vouched furnishing full descriptive particulars of quantity in terms of lumps and kilos and were duly accounted in day book. Further, he was of opinion that it was not correct to say that every purchase was exactly matched by corresponding sale, but there were some slight differences. Purchases were in terms of bulk quantity and sales were of several items of smaller quantities. Though total of sales and that of purchase of lumps might be identical, quantity in terms of kilos differed in respect of purchases and sales. He agreed that there was scope for differed in respect of purchases and sales. He agreed that there was scope for some adverse conjecture being drawn from position that value of total of sales was less than value of total purchase from same party, but this by itself according to him, would not prove concealment. He further pointed out that no sworn statement was recorded from Shri Nookaiah Chetty regarding impugned transactions. Further, none of partners of assessee-firm were also examined by ITO. In any event, evidence establishing alleged bogus nature of impugned sales and purchases were not furnished to assessee for necessary rebuttal. He, therefore, cancelled penalty. 8. Shri Santhanam, appearing for department, submitted that on facts of case, onus on department had been discharged ever applying principles laid down in Burugupalli China Krishnamurthy's case (supra). Shri Swamy, for assessee, on other hand, submitted that there is no material other than what was in assessment for making out case of concealment. Referring to Supreme Court decision in case of CIT v. Koday Eswarsa & Sons [1972] 83 ITR 369, he submitted that there was no case at all for concealment. According to him, it was entirely creation of Shri Nookaiah Chetty who was inimical to major partners. He then referred to certain statements made by one of partners Shri Madhava Rao in which partners had admitted that he entire business was being conducted by Shri Nookaiah Chetty and he was only figurehead. 9. We have considered facts of case. One fundamental aspect of concealment is that assessee has full enjoyment of certain income but for purpose of income-tax proceedings, he will not show it as part of his taxable income. These two aspects that assessee should be in possession of income and that he has not shown that income would only amount to concealment. Both aspects must be established to show concealment. In other words, if there is no material to show that alleged concealed income was in possession or enjoyment of assessee, it cannot be said that there is concealment. 10. In this case, charge made out by department is that assessee-firm had concealed income by putting through certain fictitious transactions. assessee is said to have purchased and sold from same party on same day certain goods resulting in loss for assessee. We must first of all accept that where on same day purchase is effected at higher rate and sale is immediately effected at lower rate, thus, resulting in los, there will be prima facie case for concealment. But that by itself will not be conclusive. One will have to consider very many other aspects. 11. We have mentioned that one test for concealment is that assessee must be in possession of income which he had not disclosed. Now, in this case, on facts brought on record it is clear that amount of Rs. 25,146 is not possession of assessee. transactions put through have resulted in loss for firm to this extent. If loss was fictitious, i.e., if money has not gone out of assessee's coffers, then it would amount to concealment. Now, at this stage, we may point out that there are three possibilities arising out of such transactions. One is that transaction is fictitious, i.e., neither goods nor monies had gone out of assessee's hands and there was only loss on paper without any real loss. second is collusive. In collusive case, there would be outgo of goods and money but it will go to party who is allaying himself with assessee for purpose of giving veneer of genuineness to fictitious entries. In such cases also, if there is evidence for collusion, there would be conealment. third alternative is where goods and monies had gone out of assessee to third party and there was no intention that third party should give back amounts so taken out of books of firm in some other manner. In such cases, although loss claimed may not be allowable, it would not amount to concealment. 12. We have now to see which of three alternatives will fit in with facts of case. It is in this connection that entries in books of Shri Nookaiah Chetty are relevant. It is not case that books of Shri Nookaiah Chetty do not record these transactions. Therefore, purchases effected by assessee would be shown as sales made by Shri Nookaiah Chetty and also sales effected by assessee shown as purchases there. That means books of Shri Nookaiah Chetty show in reality receipt of profit of Rs. 23,508 in respect of these transactions from assessee. As far as this receipt of Rs. 23,508 is concerned, there is nothing fictitious. It is real money which has flown from assessee to Shri Nookaiah Chetty. 13. There is absolutely no means of making out case that transactions between Shri Nookaiah Chetty and assessee were collusive. monies received by Shri Nookaiah Chetty have not been shown to have gone back to assessee. In this connection, we may also mention contain other facts regarding Shri Nookaiah Chetty. We have already mentioned that his two minor sons are entitled to 60 per cent of profits. result of these transactions are that Shri Nookaiah Chetty has got 100 per cent of profits from assessee-firm in respect of Rs. 23,508 as against normal entitlement of 60 per cent for his two minor sons. 14. In this connection, we must advert to role played by Shri Nookaiah Chetty. It is clear from assessment order than information regarding alleged fictitious entries were received only from Shri Nookaiah Chetty and his minor son. They had given very clear and pointed information. Now, such information has been given only after firm was dissolved, and there was difference of opinion between partners leading to litigation between them. information coming from parties who are not in goods terms certainly has ulterior purpose and oblique motive. In course of proceedings before civil court, Shri Nookaiah Chetty has been examined. In his deposition in O. S. No. 65 of 1976 before principal subordinate Judge Visakhapatnam on 3-8- 1977 Shri Nookaiah Chetty had said as follows: "I look after whole business (business of P. Visweswara Rao and V. Nageswara Rao firm) .... I used to attend to preparation of bills, patties, sending telegrams to customers bargaining for goods, etc. I used to do also purchases and sell goods on their behalf." Thus, from above deposition, it would appear that business of assessee-firm was really conducted by Shri Nookaiah Chetty. Although he was neither partners nor employee, he appears to be in charge of it since his minor sons are majority shareholders. 15. We may at this stage refer to statement given by Shri Nookaiah Chetty on 10-12-1984 before ITO. This appears to be in connection with certain other collateral proceedings. In those proceedings, he had stated that he assisted firm in attending to market purchases and sales. He also stated that entries regarding fictitious transactions were made by clerks and managing partner Shri Madhava Rao. Thus, there is certain amount of contradictions. We may also refer to statement given by one of partners Shri Madhava Rao himself. He was examined on 6-12-1984. In this statement, h e stated that Shri Nookaiah Chetty was his brother-in-law and had wide experience in export business. Shri Madhava Rao's family though trading family had no experience in export business. This firm was started with view to help his brother-in-law as he was having some trouble with his father. That is why he stated, majority of shares were given to his two minor sons. He further stated that although Shri Madhava Rao was styled as managing partner, he was only figure-head and all correspondence, etc., and other relevant records were handled by Shri Nookaiah Chetty. 16. After appraisal of above statements, it will be clear that although Shri Nookaiah Chetty had contradicted his earlier statements and had maintained that he had not made entries in books of account regarding fictitious sales in assessee's books, even on admissions made by him, it is clear that he was looking after business of assessee-firm. In his statement dated 10-12-1984 he has admitted that he assisted firm in attending to market purchases and sales. actual entries regarding impugned transactions were not put through by him. There are accountants for t h e purpose of making entries in books of account. But, insofar as information was given by him and he was main beneficiary of alleged fictitious transactions, i.e., he had received from firm Rs. 23,508, it will be very difficult to say that assessee, i.e., assessee-firm had put through these transactions with intention of concealing its income for purpose of Act. 17. It will be seen from above that none of three alternatives which we have discussed in para 10 would be applicable to facts of case. transaction is not fictitious insofar as funds have gone out of assessee's coffers to coffers of Shri Nookaiah Chetty. In fictitious transaction, funds will remain with assessee although books would shown that it has gone out. Commissioner has recorded that transactions are supported gone out. Commissioner has recorded that transactions are supported b y vouchers-both purchases and sales. It is not denied that Shri Nookaiah Chetty is richer by these transaction. So, it is not fictitious. It is not collusive either. There is no material to show that Shri Nookaiah Chetty after having received these amounts, is in any way obliged to pay equivalent amount to assessee. As we have pointed out earlier, it is not department's case that books of Shri Nookaiah Chetty do not show these transactions. books do not show that firm will be eligible for certain equivalent amounts from Nookaiah Chetty. So, collusion is also ruled out. 18. So, at best only third alternative could be considered, i.e., although transactions may be genuine, it was deliberately made out for assessee to suffer loss. Now, it is not necessary that every transaction of assessee should result in profits. It is open for assessee to sell his goods deliberately at loss in order to benefit some one else. Supreme Court has pointed out in case of CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 as under: "Where trader transfers his goods to another trader at price less than market price, and transactions is bona fide one, taxing authority cannot take into account market price of those goods, ignoring real price fetched, to ascertain profits from transaction." (p. 8) They had quoted their earlier decision in case of CIT v. A. Raman & Co. [1968] 67 ITR 11 (SC) wherein they had reiterated that law does not oblige trader to make maximum profit that he can make out of trade transactions. Thus, merely because transaction results in loss would not by itself show concealment. However, it is well established that in then assessment such losses cannot be allowed as admissible deduction because such loss w s not incurred in ordinary course of business - please see Commentary of Kanga and Palkhivala on Law & Practice of Income-tax, Seventh edn. at p. 881. We are not concerned with claim for loss, but case of penalty. 19. We must also refer to part played by Shri Nookaiah Chetty. We have stated earlier that he is brother-in-law of adult partners of assessee-firm. Shri Madhava Rao partner, had stated that firm itself was started to help Shri Nookaiah Chetty. His two minor sons were given 60 per cent share in profits. Shri Nookaiah Chetty was managing affairs of business. transactions recorded were beneficial to Shri Nookaiah Chetty and for no one else. firm was dissolved on account of misunderstanding between Shri Nookaiah Chetty and his brother-in-law. Certain litigations ensued which were pending. It was at this stage that Shri Nookaiah Chetty brought to notice of ITO alleged fictitious transactions. ITO had no other information other than information given to him. Under circumstances, relying on evidence of Shri Nookaiah Chetty who had reaped full benefit out alleged fictitious transactions, it would be very difficult to make out case against firm for concealment. assessee is certainly entitled to benefit of doubt under these circumstances. We, therefore, hold that this is case where no penalty is called for. We agree with Commissioner (Appeal). 20. We have given finding on facts regarding concealment. But we may also refer to two arguments on law which were parcel before us. first is that there was no concealment, i.e., assessee had filed return showing loss and ultimate assessment was still loss only. Therefore, there was no positive income involved. In support of this submission, that there should be positive income before penalty can be levied, reliance was placed on decision of Madhya Pradesh High Court in case of CIT v. Jaora Oil Mill [1981] 129 ITR 423. But, we find that as against this decision of Kerala High Court in case of CIT v. India Sea Foods [1976] 105 ITR 708. Another point raised was regarding law to be applied. assessee had filed return in 1975 when penalty was quantified with reference to income concealed. In 1976, law was amended and penalty will be based on tax involved in concealed income. Since there was no tax at all involved in concealed income, i.e., even after they additions there was only loss, it was argued following decision of Cuttack Bench of Tribunal in case of Dr. S. M. Som v. ITO [1980] 19 CTR (Trib.) 9 that no penalty could be levied. We find that Hyderabad Bench has followed ratio laid down by Cuttack Bench in that case in some cases. However, we do not offer any opinion on these two contentions raised by assessee because we have given finding on facts contentions raised by assessee because we have given finding on facts that there is no concealment. 21. departmental appeal stands dismissed. Since cross-objection was withdrawn, it also stands dismissed. *** INCOME TAX OFFICER v. POOSARLA VISWESWARA RAO AND V. NOOKAIAH CHETTY
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